The country is eagerly awaiting a second fiscal boost–but its inception is fraught with political disagreement.
The political parties of Germany’s ruling coalition were thrashing out the details of a stimulus package on Monday to try and halt a sharp recession in Europe’s largest economy. Whatever eventually emerges will most likely include a little of what each of the three political parties are hoping for–but may not be of the scale that Germany truly needs.
Chancellor Angela Merkel‘s center-right Christian Democrats party was scheduled to meet with its allies, the conservative Christian Social Union and the left-of-center Social Democrats on Monday about a second fiscal package worth 25.0 billion euro ($34.2 billion), to be announced later this month. The government launched a 31.0 billion euro ($42.5 billion) stimulus package last year, which has since been criticized for being inadequate–economists are widely reported to have said that only a third of that figure represents new spending in 2009.
Perhaps unsurprisingly, the ideologically polar parties are now struggling to reach a compromise on what the second, new package should contain. While all parties appear to want more spending on infrastructure and education, the left-wing allies are opposing the tax cuts being demanded by the Christian Social Union. The CSU believes that the package should be split equally between infrastructure and tax relief, while the SPD argues that tax cuts would encourage saving rather than spending, and would not benefited the lower sections of society.
What is the most likely outcome? According to Bank of America senior economist Holger Schmieding, the final package will probably include the main proposals of all three parties to include extra infrastructure spending, an income tax cut and a cut in social security contributions.
The tax cuts will most likely involve raising the bottom threshold for taxable income to 8,000 euros ($10,957.89), a year from 7,700 euros ($10,546.97), a year, though it could also involve removing the system where Germans are automatically bumped into higher tax brackets even when their income has not grown; a system designed to keep up with inflation.
The clamor for a big stimulus package has been growing among Germany’s unions and the public as the economy heads for its worst recession since the Second World War. Though Germany has had neither a property market bubble nor a population addicted to cheap credit, it is Europe’s largest exporter, and has been punished by flagging global spending. Companies from car maker Volkswagen to steel firm ThyssenKrupp have been struggling to cope with falling demand. Bank of America expects the German economy to contract by 2.4% this year.
For his part, Schmieding believes the vast majority of Germany’s stimulus package should be spent on tax cuts, and that spending on infrastructure would be “wasted spending.”